UK's Looming Recession is Self-Inflicted, BoJo and BoE are to Blame, Economists Say
12:09 GMT 19.06.2022 (Updated: 15:19 GMT 28.05.2023)
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The Bank of England on 16 June raised interest rates to 1.25 percent, the highest level since 2009, anticipating inflation of 11 percent this autumn. This is the fifth time the Bank has raised rates since December 2021 to tame rising inflation. The UK central bank also cut growth forecasts, adding fuel to the debate about a looming recession.
"It does look as though the UK is entering recession but it is early days yet," says Kevin Dowd, professor of finance and economics at Durham University. "But the big issue is inflation, which is essentially self-inflicted. The responsibility for maintaining price stability lies with the Bank of England, but they have been hopeless."
The Consumer Prices Index (CPI), an index used to measure inflation, rose to 9 percent in April 2022, up from 7.0 percent in March. Some economists anticipate an increase to 10 percent in May, ahead of the official release of the CPI data scheduled for 22 June, and the BoE has warned inflation will exceed 11 percent in autumn, despite five consequent interest rate hikes. Food and energy prices continue to soar in the UK with the Brits facing a cost-of-living crisis.
"Can UK inflation be controlled? Yes of course, but it will require much higher interest rates and a reining in of excessive monetary growth, and will probably entail a stagflation – a combination of inflation and recession – which could have been avoided had the Bank of England any idea of what it was doing," argues Dowd.
Steep interest rate rises are increasing borrowing costs, thus hitting households and businesses, hindering the country's economic growth and facilitating recession, JP Morgan economists warned on 17 June, echoing former chancellor Lord Hammond, who raised the issue earlier this week in an interview with Sky News. According to Hammond, the UK economy will slow down sharply in the autumn. The BoE already projects that Britain’s economy will shrink 0.3 percent this quarter, further stoking recession fears.
"There have been two months of negative growth but that does not amount to a recession… yet," says British academic and author Rodney Atkinson. "The causes of the incipient recession and high inflation are entirely political: the slow recovery from the politically decided lockdowns; the massive printing of money by the Central Bank."
Anti-Russian Sanctions
The UK and the EU have added fuel to the fire by slapping sweeping sanctions on Russia's financial, logistical and energy sectors after the beginning of Russia's special operation in Ukraine, according to the academic.
"The latest big rise in oil prices caused by the European Union’s attack on Russian oil supplies threatens another major blow to growth prospects," warns Atkinson.
In March, Johnson's government imposed sanctions on Russian energy supplies vowing to phase out the import of Russian oil by the end of 2022, despite rallying crude prices. The UK's Russia crude ban gave a boost to the cost of gasoline and diesel in the country thus accelerating inflation.
The average price per litre of petrol and diesel recently soared to 187.51p ($2.3) and 194.17p ($2.4), respectively, according to the RAC motoring organisation, up from an average of 133.36p (petrol) and 136.05p (diesel) in 2021.
The threats to cut off Russian gas supplies and Ukraine’s continuing blocking of commodity exports from Black Sea ports, despite Russia offering help, is likely to exacerbate the crisis even further, according to the economist.
"There is plenty of potential real economic growth 'in the system' but political decisions and the legacy of irresponsibility make that growth ever more difficult," Atkinson says.
Britain's Prime Minister Boris Johnson speaks during his visit to Paddington Station in London on May 17, 2022, to mark the completion of London's Crossrail project, ahead of the opening of the new 'Elizabeth Line' next week
© AFP 2023 / ANDREW MATTHEWS
Keeping Wages Low Will Deepen the Crisis
Meanwhile, some British economists warn that Johnson's strategic decision to keep wages low despite rocketing prices to fight inflation could unleash recession on the British economy much sooner.
“We cannot fix an increase in the cost of living by simply raising wages to match the increase in prices … if wages chase an increase in prices," Johnson said last week in Blackpool, Lancashire. "If we continue to do so, we risk a wage-price spiral like the one this country experienced in the Seventies."
In an open letter to the prime minister, 67 economists, including academics from the universities of Oxford, Cambridge and London, argued that he was fighting the "wrong battle" and that "the exact opposite of what is needed" amid the current crisis. According to them, wage growth of workers is not causing inflation. They further argue that asking workers "to pay the cost of living crisis by limiting their wage demands will deepen the crisis."
Real regular wages fell by 2.2 percent in the period from February to April after adjusting for inflation, and continued its slide in April and May, according to the Office for National Statistics. Looming recession and increasing costs of living have prompted protests with railway workers planning to kick off a nationwide strike in late June.
